A basic theory in accounting is that a business is considered a going concern if the business will be operating over the next 12 months. The business has scant chance of liquidating or ceasing operations in the future if a business deemed a going concern. This theory is the premise on which Financial statements are prepared.
One of the most difficult opinions a CPA will have to render is A Going Concern opinion. When the CPA feels that the company is at risk of going out of business by the end of the next fiscal year and is therefore no longer a going concern, they have to render A Going Concern Opinion. For the CPA to be lead to this final opinion, material uncertainties need to exist. Naturally, the CPA rendering a Going Concern opinion is bad news for all the company’s management, leaders, suppliers and creditors, so it’s difficult for the CPA to do. The CPA REALLY needs as much hard evidence as possible to back up their opinion because of all the dissatisfaction they are going to face. However, if the business does liquidate or cease operations within the fiscal year, and the CPA has failed to issue a Going Concern opinion, the CPA will then be at a tremendous risk them selves. The strong likelihood of an unfavorable geo-political event or ruling in a lawsuit, or something equally evident could be the existent material uncertainty.
I think these CPA’s can reduce their risk greatly if they have access to financial modeling tools that can accurately forecast the company’s future cash position at different sales volume and expense levels based on a set of solid, reasonable assumptions. In addition to reducing the risk for the CPA, good financial modeling tools provide a more solid explanation for the client as to why the CPA is rendering a Going Concern opinion.
For the most part CPA’s currently use metrics and similar types of indicators to aid them in rendering their opinion. I believe that the CPA would have much greater confidence in rendering their difficult opinion if they were given the solid foundation provided by access to financial modeling tools that accurately identified the forecasted cash, inventory, and liability position of the company at selected volumes of sales, levels of expenses, and levels of inventory at a reasonable cost.
Cashtell is Next Step CFO’s answer to such a financial modeling tool.